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A Perfect Storm of Competing Incentives is about to Hit Homeowners

Fewer than ten years ago, there were essentially no homes with smart home technology.

Today, insurance industry estimates have the percentage of homes with said technology at 12%. Eventually, the tipping point will be reached and every home owner and possibly every apartment dweller will be required to install smart technology in order to buy insurance.

As the trend gains steam, many people looking to buy or rent will restrict their search to homes or apartments that already are equipped with smart technology.

The grand march of technology shows no sign of abating. We are about to see large scale manufacturing of driverless cars. Paralysis from spinal cord injuries may soon be reversed not by radical surgery to reconnect spinal cord to the brain but through brain implants. Computers keep getting stronger and the unlimited strength of computers is now no longer a pipedream. Medical technology now allows patients to “swallow” a camera, walk around for five to eight hours while the camera takes pictures of their stomach and intestines, all to give doctors a clear picture of what exactly is happening in the patient’s digestive tract.

On the simpler, more benign, side of technology, the massive explosion of online Vegas casino games may someday render the immobile land based casinos functionally obsolete.

The question before us, then is how will insurance for home and property be affected by technological innovation?

What is Smart Home Technology?

For insurance purposes, smart technology may be exclusive to security systems. These will prevent or greatly reduce the possibility of a home break-in, a fire, or burst pipes and the ensuing flood.

Aside from these elements that directly affect the safety of the home as far as insurance is concerned, smart technology affects all aspects of the home from heating and cooling, to entertainment systems, to indoor and outdoor lighting and, most importantly, allows these functions to be inter-related enough that they can “communicate” with each other and with you through your distant computer or smartphone. They also allow you to modify any command from a distance and to check on the status of any system from a remote location.

Drawbacks of Smart Technology

The two main drawbacks are partly due to manufacturing failures and partly due to the expected high initial costs of such systems.

The many companies that produce smart equipment have thus far failed to develop inter-related systems so that a customer could buy one product from one company and a different product from a competing company. This not only reduces competition, it also gives each company less incentive to make sure that each of its products remains state-of-the-art and makes it correspondingly likely that each company will have a set of products that are genuinely inferior to other companies’ products but, because of the lack of inter-communication, customers are forced to buy all their smart products from one company.

This lack of genuine competition also slows down the time it would otherwise take for the products to come down in price so they would be more affordable to a larger number of customers. This effectively keeps many people who want smart technology in their homes to be functionally priced out of the market.

Insurance

Despite the above-mentioned drawbacks, more and more people are buying smart home products. The industry is expected to exceed 500 billion dollars per year by 2020.

At some point, the manufacturers will begin to push insurance companies to begin selling insurance for homes and property with added levels of cost to customers reflecting the presence or lack of presence of smart technology in their homes.

Insurance companies have incentive to sell insurance and smart tech companies have the incentive to sell smart tech products. If insurance companies can be compelled to insist on smart technology in homes, they can continue the practices detailed above wherein each company has a monopoly on the products any home can be equipped with.

Courts

The best way for tech companies to force the hand of insurance companies is to advocate in court cases that a given loss was caused by the lack of smart technology installed in the home. If the courts side with the tech companies, the insurance companies will have no choice but to insist that all homes be installed with smart technology.

Consumer Advocacy

The only recourse consumers have is to mobilize their political power to get legislatures to deny required smart technology in homes so long as the products from the various manufacturers are still unable to communicate with each other. This will likely bring the Congress into some clash with state legislatures which will, in turn, lead to the courts as the ultimate arbiters of the issue.

Consumers stand to be hit with a huge bill for smart technology if the process unfolds to favor the manufacturers.